11th May 2020 - AUD poised to rally, China tariffs threat may impede

Equity markets rallied on Friday, hitting weekly highs, and oil prices gained as more governments around the world began gradually reopening their economies and Sino-American trade tensions eased.

The coronavirus crisis cost the economy 20.5 million jobs in April, the steepest plunge in payrolls since the Great Depression. The Labor Department's closely watched monthly employment report on Friday also showed the unemployment rate surging to 14.7% last month, shattering the post-World War Two record of 10.8% touched in November 1982. It underscored the depth of the recession caused by lockdowns imposed by states and local governments in mid-March to curb the spread of COVID-19, the respiratory illness caused by the virus. Economists polled by Reuters had forecast the survey of establishments would show nonfarm payrolls diving by 22 million. Data for March was revised to show 870,000 jobs lost instead of 701,000 as previously reported. A record streak of job growth dating to October 2010 ended in March. The labour force participation rate, the proportion of working-age Americans who have a job or are looking for one, dropped 2.5 percentage points to 60.2% in April, the lowest rate since January 1973. A broader measure of unemployment, which includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment, surged to 22.8% last month from 8.7% in March.

The Dow Jones Industrial Average rose 455 points, or 1.91%, to 24,331, the S&P 500 gained 48 points, or 1.69%, to 2,929 and the Nasdaq added 141.66 points, or 1.58%, to 9,121.32.

U.S. President Donald Trump said on Friday he was "very torn" about whether to end the so-called Phase 1 U.S.-China trade deal, just hours after top trade officials from both countries pledged to press ahead with implementing it despite coronavirus economic wreckage. In an overnight phone call, U.S. Trade Representative Robert Lighthizer, Treasury Secretary Steven Mnuchin and Chinese Vice Premier Liu He set aside rapidly deteriorating U.S.-China relations and discussed progress since the deal took effect in mid-February. The two Trump cabinet officials said in a joint statement that both sides "agreed that in spite of the current global health emergency, both countries fully expect to meet their obligations under the agreement in a timely manner.” China's Commerce Ministry said the two sides agreed to improve the atmosphere for implementation of the Phase 1 deal, which calls for Beijing to boost its purchases of American farm and manufactured goods, energy and services by $200 billion over two years compared to a 2017 baseline. The deal brought a partial truce to an 18-month trade war between the world's two largest economies that heaped U.S. tariffs on some $370 billion worth of Chinese imports.

Chinese authorities reported on Sunday what could be the beginning of a new wave of coronavirus cases in northeast China, with one city in Jilin province being reclassified as high-risk, the top of a three-tier zoning system. Jilin officials raised the risk level of the city of Shulan to high from medium, having hoisted it to medium from low just the day before after one woman tested positive on May 7. Eleven new cases in Shulan were confirmed on May 9, all of them members of her family or people who came into contact with her or family members. The new cases pushed the overall number of new confirmed cases in mainland China on May 9 to 14, according to the National Health Commission on Sunday, the highest number since April 28. Equally worrying in China is the unknown number of asymptomatic virus carriers who show no clinical signs of infection such as a fever or a cough.

South Korea warned of a second wave of the new coronavirus on Sunday as infections rebounded to a one-month high, just as the authorities were starting to ease some pandemic restrictions. "It's not over until it's over," President Moon Jae-in told the nation, saying a new cluster shows the virus can spread widely at any time, and warning of a second wave late this year. The Korea Centers for Disease Control and Prevention (KCDC) reported 34 new infections, the highest since April 9, after a small outbreak emerged around a slew of nightclubs, prompting the authorities to temporary close all nightly entertainment facilities around the capital.

CURRENCIES

The U.S. dollar rose against some currencies on Friday after data showed the U.S. lost fewer jobs than expected last month. The DXY index, as a result, was little changed at 99.80.

EUR fell to its lowest level in a month, falling to 1.0766 but regained in late trade up towards 1.0876.

GBP was sidelined at the beginning of trade but bounced up towards 1.2467 from 1.2358.

USDJPY rose 0.4% to 106.71 from 106.27.

AUD remained range bound between 0.6505 and 0.6543 after jumping towards 0.6548 during the day.

NZD made some gains up towards 0.6148 - gapped higher this morning at 0.6157 but is back lower.

AUDNZD traded lower for the most part, down from 1.0680 to 1.0630. Gapped on the open down at 1.0609.

AUDEUR fell from 0.6030 lows towards 0.6000. Opened this morning stronger at 0.6035.

TREASURIES

Two-year U.S. treasury yields hit record lows on Friday and fed fund futures implied the Federal Reserve could cut rates into negative territory, though analysts said the move was likely technical as investors betting on higher rates were squeezed out of their positions.

Two-year yields dropped to as low as 0.105%, before rising back to 0.1508%.

Benchmark 10-year note yields were last 0.680%, after falling to 0.607% earlier on Friday. The yields have held in a tight band between 0.543% and 0.785% since the beginning of April.

In a rebuke to Germany's highest court, the European Union's top court on Friday said that it alone had the power to decide whether EU bodies are breaching the bloc's rules. The 10-year Italian bond yield fell as much as 10 basis points to 1.794%, pulling it further away from the 2% hit earlier this week.

The German 10-year yield rose after the U.S. jobs data and was last up two basis points at -0.532%. Other core euro zone yields gained 1 to 2 basis points.

COMMODITIES

Gold eased from its highest in nearly two weeks, investors growing hopeful about economies reopening after lockdowns. Spot gold fell 0.8% to $1,704.53 per ounce after hitting $1,722.56. Prices were up 0.3% for the week.

Iron ore and steel futures in China gained in last week's three trading sessions, supported by surging demand from local mills as the country returns from lockdowns related to the coronavirus pandemic. The most-traded iron ore futures on the Dalian Commodity Exchange, for September delivery, ended up 2.6% to 633 yuan ($89.52) a tonne, the highest since Aug. 1. Over the week it was up 3.8%. Spot prices of iron ore with 62% iron content for delivery to China rose to $84.8 per tonne.

Oil prices settled 5% higher in their second consecutive week of gains as U.S. producers cut production with the number of drilling rigs falling to a record low, and as more states moved ahead with plans to relax lockdowns intended to halt the coronavirus pandemic. Brent crude settled up $1.51, or 5.1%, at $30.97 a barrel. U.S. West Texas Intermediate crude futures (WTI) gained $1.19, or 5%, to $24.74 a barrel. Both contracts posted a second week of gains, with Brent advancing over 18% this week and WTI up about 33%.

ECONOMIC CALENDAR TODAY

No Australian Economic data releases today.

New Zealand - April retail card spending (last -3.9%, forecast -50.0%). Lockdown restrictions in effect through most of April.

AUD THOUGHTS AND TECHNICAL ANALYSIS

AUD neared the upper end of a well supported 0.6370-0.6570 consolidation range on Friday, trading to a 0.6543 high. Concerns grew over the weekend as tensions continue to rise over China's barley tariffs. Australia on Sunday raised concern that China is considering imposing hefty tariffs on imports of Australian barley. "The Australian government is deeply concerned by reports that unjustified duties may be levied on Australian barley imports into China," Trade Minister Simon Birmingham said in a statement. Australia is by far China's top supplier of barley, exporting about A$1.5 billion to A$2 billion ($980 million to $1.3 billion) worth of the grain a year. China takes more than half of Australia's barley exports. The Chinese tariff threat comes as ties have frayed between Canberra and Beijing, exacerbated by a push by Australia for an investigation into the origins of the coronavirus outbreak. Australian grain producers have been informed by China's Ministry of Commerce (MOFCOM) that it is considering imposing a dumping margin of up to 73.6% and a subsidy margin of up to 6.9% for barley imported from Australia, said Andrew Weidemann, chairman of industry group Grain Producers Australia. Barley exporters and the Australian government have been given 10 days to respond to MOFCOM.

Into this week, as more countries ease lockdown and social distancing measures, the focus will be on the pace of demand recovery. As a guide, China growth rebounded sharply in March after a collapse in February. China macro data in April may see further strength, although we will have to wait until post the National People’s Congress on May 22 for clarity on China policy and economic performance going forward. A resumption of economic activity globally creates a positive backdrop for risk assets, but any rally could be cut short if US-China tensions re-escalate. Headlines and tweets from Trump and his top trade and economic advisers will again gain considerable attentions.
China’s credit growth is expected to continue its positive trajectory. Loans may be significantly higher than the usual seasonality, supported by bond issuance in April. Meanwhile, inflation (Tue) should ease further with lower pork and vegetable prices. PPI deflation will deepen because of declining commodity prices from oil, to cement, coal and rebar. Softening inflation environment will allow further easing from the PBoC, including RRR and interest rate cuts.
Expect the mild recovery to continue in China’s April activity data (Fri). Production may rebound to positive growth, in line with both coal consumption and PMIs. The contraction in retail sales will narrow to low single digit as car sales, for example, almost recovered to normal levels in April. However, recovery in China’s investment growth may lag with constraint to infrastructure investment and diminishing corporate profit. The monthly growth rate in FAI may still be negative. Further policy support, especially fiscal policies are needed but more clarity will need to wait for the annual budget announced on 22 May at the National People’s Congress.
In Australia, labour force survey (Thursday) will be the first that capture the effects of COVID-19 on the labour market. We know the report will be ugly given other information – weekly payrolls, JobSeeker applications and Roy Morgan’s unemployment rate measure – have all deteriorated significantly. But just how bad is anyone’s guess for a few reasons. First, the reference period for the April survey was 29 March to 11 April so may not have picked up all of the labour market deterioration seen in the other more timely indicators. Secondly, the ABS records persons as employed if they: (i) were on paid leave; (ii) were stood down but were paid for some part of the previous four weeks; or (iii) were stood down for four weeks or less without pay but believe they still have a job to return to. Thirdly, some job losers who have applied for JobSeeker unemployment benefits may be less inclined than usual to report to the ABS that they are officially unemployed because the Government has waived mutual obligation requirements, including the need to look for work, until 22 May.
No Australian Economic releases today with low level NZ retail card spending the only release.

For the AUD, opens this morning at 0.6525 - slightly weaker from the highs seen on Friday.Upcoming Australian data is likely to show the economy suffering record contractions with unemployment spiking to post-depression highs. Company failures and earnings shocks will capture headlines from bulging central bank balance sheets and massive fiscal stimulus. In this next stage, risk aversion is likely to take hold and AUD's stellar run may potentially reverse. Technicals favour bulls for the moment, RSIs rise & AUD remains above the rising 10- & 21-DMAs (0.6470 and 0.6430 respectively).Resistance at 6.6545 followed by 0.6570. Support 0.6490-95.